Article by Simon Sweetman published in the August 2002 issue of Tax Adviser. Simon Sweetman is an independent tax adviser, a former Inspector of Taxes and vice chairman of the taxation unit of the Federation of Small Businesses.
The Finance Bill must have been good for small businesses. The Chancellor, Gordon Brown, told us so and he has also reminded us – when talking in March about the banks and the way they treated small businesses:
‘There are over 3.5 million small businesses in the UK representing 55 per cent of jobs, 50 per cent of all business turnover and one trillion pounds of economic activity a year.’
So small businesses matter to the economy. But what has happened since the Chancellor spoke in March to persuade the banks to change their ways ? Or, to generalise the question, everybody may talk nicely about small business, but who does anything about it?
That quote tells us too that the Chancellor, from the numbers, is using one of the broader of the 23 different definitions of ‘small business’ to be found in various places in legislation, domestic and European. The wide number of different definitions is also a clue as to why it can be hard to find ways of helping small businesses – if different people think that your target is in different places, they are unlikely to agree how close you are to hitting it.
From the point of view of the groundlings, a business employing 250 people or making a profit of £300,000 a year is not a small business, but under some definitions these businesses will be seen as ‘small’. Most of those 3.5m – well over 90 per cent of them – are ‘microbusinesses’ ranging from one person to five or six staff.
But let’s look at that 3.5m again: only perhaps one in five of those is trading through a limited company, and yet when the Chancellor cuts the rate of corporation tax he talks about helping small business. Is the aim to tell businesses that if they want tax breaks they must incorporate?
If that is the idea, then opinions differ sharply. The Institute for Fiscal Studies suggests there are 1.2m self-employed people who might save tax by incorporating, and that many of them might do so. Figures produced by the Federation of Small Businesses (FSB) also suggest fiscal advantages to incorporation even at the lowest level. Others are much less sanguine about this: the additional costs and administrative burdens, not to mention the rather fuller application of generally accepted accounting principles (GAAP), may be a deterrent, and the actual process of change may be complicated in some cases. Certainly if all these small businesses incorporated it would at least treble the number of limited companies in the country, swamping Companies House and providing a bonanza for the accountancy profession. The running cost of a company in professional fees is significantly higher than that of a sole-trader, and some of the changes this year continue to take company taxation away from income tax practices; the tax treatment of intellectual property rights is not going to be high on most small business wish lists. Anecdotal evidence does suggest, though, that a significant number of new businesses are going for incorporation straight away.
The odd thing about this drift to incorporation – if it is deliberate government policy – is that most of that saving is not going to be in tax, it is going to be in national insurance and it is going to involve paying dividends rather than remuneration. Why would the government wink at the avoidance of national insurance here after going to such lengths to stop it in far fewer cases with the IR35 legislation?
And in particular, if people incorporate, they can stop paying Class 4 NIC. There is more to be said about that, because it carries no entitlement to benefit at all and is simply an extra tax charged on the self-employed. Is that helping small businesses?
Next year’s Class 1 NIC changes will be no help either, though in this case they will hit companies as hard as the unincorporated business.
That is one problem for small employers, and pay as you earn (PAYE) is still another. The implementation of the Carter Report may be a light at the end of the tunnel, but for many it is a long way off and in the meantime the new tax credits will complicate life for the proprietors of small businesses wrestling with PAYE among their other problems. And the element of coercion is not helpful for the small, but real bunch of cyberphobes who will still be trying to run their businesses with paper.
What about the new flat rate VAT schemes – at least they should ease some of the compliance problems? Well, up to a point. I understand that it is a European Union (EU) requirement that the flat rate schemes do not collect less VAT than the standard scheme, and of course as all businesses are different, some will win and some will lose by adopting the scheme. But in order to find out, everyone has to got to go through the exercise to see whether they will either pay less VAT or indeed pay slightly more, but save on administration.
Then there are minor points. The reduction in beer duty for micro-breweries and the increase for alcopops has to be praised, – if only on grounds of taste – and provides some help for a few hundred small businesses, though not, it would so far seem, for the consumer where the micro-brewery is selling on to a pub chain. Then the new 100 per cent first year allowance for very low emission cars is a potential opportunity for considerable tax savings, if small businesses can kick the Mercedes/BMW habit.
What is a real problem for small businesses is the rate of legislative change however well intentioned. Small businesses are on the whole advised by accountants who are small businesses themselves, and how is the sole-practitioner accountant in general practice to keep up? Any firm without a dedicated tax department or easy access to a tax specialist is in trouble, and even then it becomes difficult to know when you need to call for help. It is asking for trouble for a hard pressed general practitioner to try to handle Revenue enquiries in what little time he can spare, but that is what happens in most cases.
Perhaps we also need to consider what is happening in the Revenue. The change of approach to the new touchy-feely empowering Revenue (as it wants to be seen) is going to be very difficult, and if it tries to do this without being able to put the resources into it that will be a disaster. For Working Together to function properly across the country it will need time and effort on all sides and, once again, the Revenue too needs time to bed in all the changes and all the new things it has taken on. In their early years Business Support Teams have struggled both with local indifference within the Revenue and with suspicion outside it. There seems to be a genuine will to change that, but it is not going to be easy.
Statistics suggest that in the United Kingdom (UK) we have the fastest growing small business sector in the EU (except for Ireland), but life for small businesses remains difficult. Pressure from legislative regulation, from banks, and from big businesses they may have to deal with, all makes for a difficult life.
Overall it looks as if (once again) the road to small business hell is paved with other people’s good intentions. If life is genuinely to be made easier for them, then the government and the Revenue will have to listen harder to what they really want.
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August 2002 by